Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years.The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76.Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects.Given this, you know the:

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Firm A uses straight-line depreciation, which spreads the cost evenly over 5 years, while Firm B uses MACRS, which accelerates depreciation in the earlier years. By Year 3, Firm B will have recognized more depreciation, reducing its taxable income and thus increasing its operating cash flow compared to Firm A.

Firm a Uses Straight-Line Depreciation